For more information about Vanguard funds or Vanguard ETFs, visit advisors.vanguard.com or call 800-997-2798 to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.

Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

Investments in bond funds are subject to interest rate, credit, and inflation risk.

Diversification does not ensure a profit or protect against a loss.

Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk.

All investing is subject to risk, including possible loss of principal.

At the start of 2016, global stock markets plummeted, rattled by China, oil, and fears that the Federal Reserve was dangerously out of step with monetary policies in Asia and Europe. The turmoil fueled speculation that the United States might be heading for recession, even as most indicators painted a picture of economic health.

Nearing full employment

Since the start of 2014, the U.S. economy has produced, on average, more than 200,000 net new jobs per month, driving the unemployment rate from 6.6% to 4.9%. (At its 2009 peak, the rate stood at 10%.) The broadest measure of unemployment, which counts marginally attached workers and those working part-time for economic reasons, has also registered big improvements. The numbers suggest that we’re nearing full employment.

At full employment, of course, net new job growth is constrained by the number of new workers. Over the past few years, about 70,000 new workers have entered the labor force each month. Working-age adults who had dropped out of the workforce can supplement this supply of labor, but the pool of potential workers is shallower than a cursory review of labor force participation trends would suggest.

The labor force participation rate has trended lower since the 1990s. The decline accelerated during the global financial crisis. In the past year, strong job growth has produced an uptick in participation. But rates are unlikely to return to their late-1990s peaks. Demographic and cultural trends such as the aging of the population and declining participation for 16- to 24-year-olds will most likely produce a continued, gradual decline.

Slower job growth, no recession

Our outlook suggests that job growth will moderate toward 150,000 or fewer net new jobs per month through the rest of the year. Consensus forecasts, compiled by the Federal Reserve Bank of Philadelphia, are higher: It sees job growth of between 180,000 and 195,000 in the first three quarters of 2016 and a decline toward 150,000 in the fourth. We also expect the pace of change to be uneven, with some monthly reports falling far short of our comparatively modest forecast. When reality breaks with the consensus, markets will react, and the noise will crescendo.

At this stage in our long economic expansion, however, slowing job growth is not a sign of recession. It’s a symptom of a labor market near full employment. As we explain in U.S. economy will bend, not break, our analysis of financial and economic variables puts the odds of a near-term recession at about 10%.

So brace for bad headlines. Prepare to put the data in a broader—and less alarming—economic context. And fight the fear with patience and perspective.

Notes:

All investing is subject to risk, including possible loss of principal.

Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk.

Joe Davis

Joseph H. Davis, Ph.D., is a principal and Vanguard’s global chief economist. He is also global head of Vanguard Investment Strategy Group, whose investment research and client-facing team conducts research on portfolio construction, develops the firm's economic and market outlook, and helps oversee the firm’s asset allocation strategies for both institutional and individual investors. In addition, Mr. Davis is a member of the senior portfolio management team for Vanguard Fixed Income Group. Mr. Davis frequently presents at various investment forums and has published studies on a variety of macroeconomic and investment topics in leading academic journals. Mr. Davis earned a Ph.D. in economics at Duke University.

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For more information about Vanguard funds or Vanguard ETFs, visit advisors.vanguard.com or call 800-997-2798 to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.

Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

Investments in bond funds are subject to interest rate, credit, and inflation risk.

Diversification does not ensure a profit or protect against a loss.

Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk.

All investing is subject to risk, including possible loss of principal.

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